Lower gas prices not enough to lift U.S. economy

View full sizeAssociated Press fileShoppers walk through the South Shore Mall in Braintree, Mass. U.S. retail sales declined in April and May, pulled down by a sharp drop in gas prices. But even after excluding volatile gas sales, consumers increased their spending only modestly.

WASHINGTON -- Cheaper gas has yet to cause consumers to spend enough on other goods to boost the slumping economy.

Americans
barely increased their spending at retail businesses this spring,
leading economists to predict slower economic growth in the April-June
quarter.

But the news from a spate of government data Thursday
wasn't all bad. Consumers spent more in May on cars, appliances and
furniture -- big purchases that help drive growth. Businesses continued
to restock this spring at a healthy pace.

If
gas prices stay low, Americans are likely to spend more freely this
summer on other goods, from autos and furniture to electronics and
vacations, that fuel economic growth. Gasoline purchases tend to provide
less benefit for the U.S. economy because some of the money goes to
oil-exporting nations.

"The continued fall in gasoline prices
should support consumption by freeing up cash to be spent on other
items," said Paul Dales, senior U.S. economist at Capital Economics.

Ian
Shepherdson, chief U.S. economist at High Frequency Economics agreed.
"The drop in gas prices means summer spending will accelerate," he said.

Retail
sales fell 0.2 percent in May and April, the Commerce Department said.
It was the first back-to-back decline in two years. But overall sales
were pulled down by a 2.2 percent decline in gasoline station sales,
reflecting the lower prices.

Excluding volatile gas station sales, retail sales grew just 0.1 percent in May and dipped slightly in April.

Consumers
reduced spending in May at building supply stores, such as Home Depot,
and general merchandise stores, a category that includes Wal-Mart and
Target.

Auto sales rose solidly, one of the few positives in the
report. Consumers also spent more on electronics, clothing and
furniture.

Much more spending is needed to lift to an economy that
has limped along since the Great Recession ended three years ago.
Hiring has slowed sharply this spring. And unemployment remains high at
8.2 percent.

Wage increases are trailing inflation. And Europe's debt crisis has kept investors and companies on edge.

"All
these things are making people feel uncomfortable about spending,"
Christopher said. "It is obvious that consumers are starting to hold
back in the second quarter."

Christopher expects the economy to
grow at an annual pace of 1.8 percent in the April-June quarter, just
below the first quarter's annual pace. That's roughly in line with other
economists' forecasts.

The one major positive development in the past two months is that gas prices have tumbled.

The
producer price index, a measure of wholesale prices, dropped 1 percent
in May, the Labor Department said in a separate report. That's the
biggest decline since July 2009. It reflected a 9 percent fall in
wholesale gas prices.

Consumers are already feeling less pinched
by gas prices. The average national price for a gallon of gas was $3.54
Wednesday -- 40 cents cheaper than the year's peak price in early April.

Weaker consumer spending and mild
inflation could give the Federal Reserve room to hold interest rates at
record-low levels and potentially take other steps to boost the economy.
Still, most economists don't expect the Fed to take further steps at
its policy meeting next week.

A third report Wednesday showed that businesses restocked at a slightly faster rate in April than March.

When
businesses step up restocking, they order more goods. That generally
leads to increased factory production and higher growth. But further
stockpile growth depends on increased spending by consumers.

Some
of the weakness in retail sales may be payback for stronger spending at
the start of the year. A warm winter encouraged some homeowners to get a
head start on remodeling and landscaping projects that normally occur
in spring.

Still, economists worry that consumer spending may further weaken if hiring and pay doesn't pick up.

Workers'
average hourly earnings rose just 1.7 percent in the 12 months that
ended in May. That was below the pace of inflation during that period.

And
job growth has slowed since the start of the year. Employers added
226,000 jobs on average during the first three months of the year. In
April and May, they added an average of only 73,000.

"It looks
like concerns over slowing job growth, a drop in equity markets over the
past three months, and softer income growth are making U.S. consumers
think twice about their purchases," said Jennifer Lee, senior economist
at BMO Capital Markets.

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